TEC (Theory) Seminar: Michael Grubb, Boston College

Speaker

Michael Grubb, Boston College

Title

"The Illusion of Competition" 

Abstract

In markets where consumers must search sequentially for prices, whether a firm sells its product under one brand name or two distinct brands is consequential for market outcomes. If each firm sells a single brand then any consumer who receives multiple price quotes places firms in competition with each other. However, a two-brand firm can exhaust the search capacity of a  consumer who searches for exactly two price quotes, making them "captive" to that firm. Moreover, if consumers are under an "illusion of competition" in which they believe all brands to be independent competitors, then capture is more likely because consumers do not direct their searches to independent firms. Moreover, a two-brand firm can lower consumers' estimates of price dispersion, discouraging them from searching further, by setting identical prices. We extend canonical search models to show that multi-brand firms can raise equilibrium prices by both mechanisms. As a result, breaking the illusion of competition by advertising brand ownership may lower prices. Alternatively, requiring two merging firms to consolidate their brands rather than operate them separately or curtailing brand proliferation by limiting the visibility of such duplicate brands on online platforms can intensify price competition and benefit consumers. In some cases, however, such policies may be counterproductive.